Wednesday, 25 May 2016

QE for the bankers failed, time for something else

 
 
After the 2007-08 global financial sector insolvency crisis the Bank of England began creating money via a process called quantitative easing (QE) in an attempt to prop up the UK economy. This 'new money' was distributed to the private banks that caused the financial sector meltdown in the first place. If the purpose of this exercise was to stimulate an economic recovery it was an abject failure (the UK suffered the slowest post-crisis recovery in economic history), but if the process was intended to further enrich the wealthiest people in society it was a roaring success.

How QE for the bankers failed

It's absolutely clear that the original £375 billion tranche of quantitative easing cash from the Bank of England benefited the wealthy minority. This isn't just my opinion, the Bank of England openly admitted that at least 40% of the benefit of their quantitative easing programmes went to the wealthiest 5% of households.

Anyone who understands basic macroeconomics will know why the accumulation of the majority of 'new money' by the wealthiest minority is a poor economic outcome. The super-rich are very much more likely to hoard any additional wealth they receive than the poor and ordinary. Ordinary people are much more likely to create economic demand by going out and spending it.
 
If monetary policy results in a ten figure windfall for the super-rich minority then the majority of it is likely to end up re-inflating the property market, re-inflating the stock market or getting stuffed in secretive offshore tax-havens.

If further enriching the wealthiest minority and re-establishing the economic conditions that existed before the 2007-08 meltdown were the objective then QE for the bankers was highly successful. If the objective was to stimulate any kind of economic recovery QE for the bankers was an  absolutely appalling waste of £375 billion.
 
Alternative forms of QE

 
If the benefits of 'new money' are distributed in different ways then the economic benefits could be much better. There are two main ways in which quantitative easing can be used differently in order to avoid the situation where the majority of the 'new money' ends up inflating unsustainable asset bubbles or stuffed into tax-havens.
 
Direct Quantitative Easing
 
Instead of creating 'new money' and distributing it to the private banks to do whatever they like with it, Direct QE cuts out the middle man and directs the 'new money' towards economically beneficial projects.

There are plenty ways a government intent on creating prosperity could use Direct QE cash to stimulate the economy and make the UK an attractive place to do business. High speed broadband for every home and business in the UK, improvements to our dilapidated public transport infrastructure, investment in the education system, science and R&D, pro-active health policies to keep the UK workforce in better condition, investment in renewable energy projects and energy-saving technologies ...
 
This quote from the respected economics professor Robert Skidelsky makes the case for Direct QE.
"The only way to ensure that 'new money' is put into circulation is to have the government spend it. The government would borrow the money directly from the central bank and use it to build houses, renew transport systems, invest in energy-saving technologies, and so forth. Sadly, any such monetary financing of public deficits is for the moment taboo. It is contrary to European Union regulations – and is opposed by all who regard post-crash governments' fiscal difficulties as an opportunity to shrink the role of the state." [source]
Skidelsky is making the case that if the central bank is going to magic money out of nowhere via quantitative easing, it would be better given to the government to invest in infrastructure projects and services (creating jobs and economic demand in the process).
 
'Helicopter money'
 
The other form of QE that would likely be far better for the economy than simply handing out 'new money' to the bankers who caused the economic crisis in the first place is nicknamed 'helicopter money'.

The idea of 'helicopter money' QE is that the central bank should distribute an equal share of the 'new money' that they create to each citizen. For example, if the Bank of England creates £65 billion in quantitative easing money, then each citizen in the UK should get a citizen's dividend of around £1,000 each.

Some people might try to argue that giving an equal share of 'new money' to every person is some kind of communist lunacy, however a citizen's divedend form of QE is actually quite a free market policy in comparison to QE for the bankers (handing control over the distribution of 'new money' to an elite group of establishment insiders). In fact the nickname 'helicopter money' was popularised by the right-wing ideologue Milton Friedman.

Reforming EU policy
 
As Skidelsky pointed out in the quote above the current policy of the EU blocks the European Central Bank or the central banks of other member states (like the Bank of England) from using Direct QE to fund infrastructure projects and stimulate economic demand. As far as the EU is concerned it's only acceptable to create 'new money' if it is distributed to the banks so that it can be used to benefit the wealthy minority at the expense of everyone else.

The solution to this problem would be for the UK government to demand that EU law be changed to allow quantitative easing money to be used in ways that benefit the whole economy, rather than exclusively benefiting the wealthiest minority. However the obvious problem is that the UK government is a Tory one with no interest in doing anything but serving the interests of the wealthiest minority, (serving the interests of their wealthy backers is the central ideology of the Tory party). It's obviously an utterly ludicrous fantasy to imagine a Conservative government lobbying the EU for them to overturn a monetary policy that exclusively benefits the rich at the expense of wider society and the economy as a whole.

Tory slash-the-state fanaticism
 
Another point that Skidelsky raised in the above quote is the way that many (including the Tory government) "regard post-crash governments' fiscal difficulties as an opportunity to shrink the role of the state". It's refreshing to see an economist admit that this is what the Tories are up to.

There's no way that the Tories would ever adopt a policy of Direct QE because using the state to administer an economic recovery where the private sector banks had manifestly failed would be a massive refutation of their core ideology that (despite all of the evidence to the contrary) the private sector is always more efficient than the state.

It's astonishing that such a huge number of people fell for the Tory austerity con. Even when they first started with their absurd "we must cut our way to growth" propaganda campaign it was obviously complete gibberish, but after six years of it, it's now absolutely clear that the austerity narrative is nothing more than a smokescreen to cover up the same old Tory policies of distributing as many state assets as possible to the private sector and the transference of wealth from the majority to the wealthiest minority.

As long as the UK is governed by a bunch of ideologically driven right-wing fanatics we'll be stuck with their economically toxic austerity dogma and the idea of the UK government administering a direct stimulus led recovery will remain a complete fantasy.

Corbynomics
 
The mainstream press have done such a consistent job of attacking and belttling Jeremy Corbyn that very few people actually understand what his economic policies are. For every column inch written about Corbyn's plans for the economy there's doubtless been hundreds of inches of absolute drivel written about how he's scruffy, too old, too left-wing, didn't sing the national anthem, didn't bow deeply enough at the Cenotaph ...

One of the most absurd and oft-repeated criticism is that Corbyn would take us back to the 1970s when what he is actually proposing is the use of Direct QE to fund infrastructure projects, which is clearly a modern progressive policy, albeit one that is based on a wealth of evidence from economic history rather than pure ideology like Tory austerity.

The Skidelsky quote above is actually a glowing commendation of Labour Party economic policy and a blatant swipe at Tory ideological austerity. Of course right-wing austerity fetishists will resort to the age old tactic of trying to smear their critics as lunatics, however with Skidelsky it's a bit of a problem given that he's is a former House of Lords Treasury spokesman for the Tory party! It's  obviously a little bit difficult for Tory tribalists to smear someone as just a "loony leftie" when they're a respected economics professor and former Tory party treasury spokesperson.

Blairite Shills

One of the most dispiriting things of all when Jeremy Corbyn announced his Direct QE policy was the way that a number of Blairites in the Labour Party joined in with the Tory chorus of disapproval, even going as far as calling Direct QE "economically illiterate".

Some of the worst offenders were Yvette Cooper (wife of Ed Balls, the architect of Labour's disastrous 2015 austerity-lite election campaign) and Chris Leslie (Ed Balls replacement as shadow chancellor).

It was utterly bizarre to see so-called Labour Party politicians furiously attacking Direct QE (a policy of stimulating the economy by improving infrastructure and creating jobs) and defending the failed policy of QE for the bankers (a strategy that resulted in a massive bonanza for the super-rich minority and pretty much nothing good for anyone else).

It just goes to show how much work Jeremy Corbyn has got to do to turn the Labour Party into a genuinely progressive party when so many Labour MPs so clearly favour the interests of the extremely rich over traditional Labour values like social justice, jobs and prosperity for all.

Conclusion

On the positive side it's great to see Skidelsky talking a bit of economic sense. After six years of economically toxic austerity gibberish it's about time more economists stood up and proposed alternatives like Direct QE.

If the Bank of England is going to use quantitative easing to create more 'new money' then it will need influential economists like Skidelsky arguing against a repetition of the failed QE for the bankers experiment.

On the negative side the UK political establishment looks to be stuck with a bunch of ideologically driven right-wing fanatics for the forseeable future, and as long as economic policy is dictated by hard-right economic ideology, the concept of the UK benefiting from any kind investment led recovery is a complete pipe dream.

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